Is the Russia–Ukraine War a Threat to the Global Economy?
Before Russia stunned the world by invading Ukraine, it was widely believed that the economic ties formed through globalization would help promote peace. But the war is testing that assumption and drawing attention to the vulnerabilities in far-flung supply chains, which were already under pressure because of the pandemic and recovery.
In response to the brutal invasion of Ukraine, the United States, European Union (EU), United Kingdom (UK), and their allies are using financial sanctions to inflict severe damage on Russia’s economy and pressure its leaders to end the war. But that effort likely comes at a significant cost to the global economy.
How Western Sanctions Are Hurting Russia?
Western nations acted together in unprecedented fashion to isolate Russia from world trade and the global financial system. Some of Russia’s largest banks have been expelled from SWIFT, an international payments system. Assets that Russia’s central bank held in North America and Europe have been frozen, restricting its ability to prop up the value of its currency, the ruble.1
Germany shelved the opening of a new gas pipeline that would have supplied natural gas from Russia, and the United States and the United Kingdom have announced bans on Russian oil imports.2 Hundreds of Western companies have suspended operations or pulled out of Russia, the world’s 11th largest economy, either to comply with sanctions or because of public outrage over the war. Some wealthy oligarchs believed to be close to the Kremlin have also had their assets frozen or seized.3
The effects of sanctions have clearly been felt in Russia, where the central bank raised its key interest rate to 20%, and it’s estimated that the Russian economy could contract up to 10%.4-5 Until recently, Russia was a full participant in the global economy, so being cut off from Western supply chains and technologies could be painful for Russian businesses and consumers. It remains to be seen whether China will step in to fill the void left behind by the West.
Supply Shocks
Russia is a major producer and exporter of food, energy, metals, and other raw materials that often fluctuate in price based on the balance between supply and demand across global markets.6 Therefore, supply shocks stemming from the war and sanctions have caused price spikes for some high-demand goods.
Energy Markets Under Pressure
Russia is a top energy exporter, so crude oil and natural gas prices have surged since the conflict began, largely due to concerns about supply constraints. The EU relies heavily on energy imported from Russia (about 40% of its gas supply and almost 25% of its oil). Thus, reductions in energy deliveries from Russia would be difficult to replace and could worsen shortages in the global market.7
Metal and Semiconductor Shortages
Russia is also a major producer of metals such as palladium (needed for catalytic converters), platinum, aluminum, copper, and nickel (needed for batteries).8In addition, about half of the world’s supply of the neon gas used to make semiconductors came from Ukrainian companies that have been forced to close their operations. Until neon production is ramped up elsewhere, shortages could exacerbate the chip shortage that has been slowing the production of new cars, computers, electronic devices, and other products.9
Food and Fertilizer Disruptions
Russia and Ukraine together provide:
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Nearly 30% of global wheat exports
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17% of corn
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32% of barley
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75% of sunflower oil
Sanctions restrict Russian exports. Fighting has blocked Ukrainian shipments.
Russia also produces about 15% of the world’s fertilizer. Fertilizer prices have surged alongside natural gas costs. This threatens crop yields worldwide.10
Because of these pressures, grocery bills will likely rise further. The United Nations warns global food prices could jump another 22%. Developing nations face the highest risk, especially in North Africa, the Middle East, and parts of Asia.11
World hunger may increase. This pressure on household budgets makes long-term financial planning even more important. Learn more at Financial Advice for Retirement Planning for Florida Retirees.
Ripple Effects
Russia and Ukraine represent only about 2% of global GDP. Still, high energy prices and supply disruptions could slow growth worldwide.12
The OECD estimates global economic growth could fall by 1.1% in the first year after the invasion. Inflation could rise by about 2.5%.13
Countries with strong trade ties to Russia and Ukraine will feel the greatest impact. Lower-income households will suffer more because food and energy take up a larger share of their budgets.14
The OECD also projects:
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Eurozone growth could drop by 1.4%
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U.S. growth could fall by 0.9%
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Inflation may rise 2% in Europe and 1.4% in the U.S.
Europe has more exposure to the Russia-Ukraine conflict than the United States, but in both economies, inflation had already climbed to levels that haven’t been seen for decades.15
In the coming months, the world’s key central banks will face the tricky task of raising interest rates enough to control inflation without causing a recession. There could also be longer-term repercussions, such as the reorganization of global supply chains and less integrated financial markets.
Estimates and projections are based on current conditions, are subject to change, and may not come to pass.
1) The Wall Street Journal, March 18, 2022
2) The Wall Street Journal, March 23, 2022
3) The New York Times, March 22, 2022
4, 15) The Wall Street Journal, March 7, 2022
5) The Wall Street Journal, March 16, 2022
6-8, 12-13) OECD, March 2022
9) Reuters, February 25, 2022
10) The New York Times, March 20, 2022
11) Bloomberg, March 13, 2022
14) Associated Press, March 30, 2022
